Undervalued Canadian Financial ADRs

Published Wed, 10 Feb 2016 12:00 CET by TopYields.nl


Canadian ADRs that trade on the NYSE can offer the opportunity to capitalize on the growth that some of these stocks incur as a result of their strong fundamentals and dividend growth. ADRs (American Depositary Receipts) trade exactly like the stocks, only some of them in over-the-counter (OTC) markets and with a different ticker than the one used in the local exchange. Normally, ADRs leave room for further growth and higher dividends because they are cost effective and avoid foreign taxes in each transaction. Furthermore, ADRs are a great way to get exposure in the U.S. equity markets.

This article discusses three Canadian ADRs that trade on the NYSE. All three firms are large caps of the financial industry, with a focus on asset management and wealth protection. Although all three have underperformed the market on a YoY comparison, they are currently valued at prices which are lower than their present value, and thereby they are considered to be undervalued. This means that they present an opportunity to buy, leaving room for their market price to be equal to their present value.

Name Price ($) Earnings/Share (EPS) Book Value/Share (BVPS) Graham Number Discount to Fair Value Dividend/Share (DPS)
Brookfield Asset Management 27.56 2.63 21.22 35.44 77.77% 0.48
Manulife Financial 12.64 0.90 10.90 14.86 85.08% 0.52
Sun Life Financial 27.33 2.51 21.90 35.17 77.71% 1.18

Brookfield, Manulife and Sun Life YoY Stock Performance Graph
Brookfield Asset Management (USA) (NYSE: BAM) is a Toronto-based asset management company that operates private equity, property, infrastructure and renewable energy assets. Through its Asset Management, Property, Renewable Energy, Infrastructure and Private Equity & Other segments, Brookfield manages a range of investment funds and other entities that enable institutional and retail clients to invest in these assets. The company’s products include publicly listed partnerships as well as private institutional partnerships readily available to institutional investors and pension funds.

Dividend Discount Model: Brookfield declares a dividend of $0.48 per share and its current market price is $28.82. Considering its dividend history, analysts estimate a dividend growth of 1.5% and a discount rate of 3%. Therefore, the present value of the Brookfield stock is calculated as follows:
Present Stock Value = Dividend per share / (R discount - R dividend growth) = $0.48 / (0.03 - 0.015) = $0.48 / 0.015 = $32. When a stock’s market value is lower than its present value, the stock is undervalued, representing an opportunity to buy. The same result is derived if we apply the Graham Number, where the stock is discounted by 81.33%.

Q3 2015 Financial Results (in USD): Revenues reached $5.06 million, up 8.5% YoY from $4.66 million, generating a gross profit margin of 26%, slightly above 25.6% in the same quarter last year. Operating expenses increased 15.8% YoY to $4.07 million from $3.51 million, thereby generating an operating income of $990 million, down 13.7% YoY and a net income of $845, down 23.8% YoY compared to Q3 2014. On the upside, Brookfield increased its assets under management to $220,383 million, up 8.1% YoY from $203,840 million. The company continues to see opportunities to sell mature assets at winning valuations while it also capitalizes on the opportunity to raise a range of private funds with a target of $23 million.

Manulife Financial Corporation (USA) (NYSE: MFC) is a Toronto-headquartered financial company that offers a range of wealth management products and service to retail, corporate and institutional clients. The company has a network of subsidiaries that operate in Canada, the United States, and Asia and it offers various types of health and life insurance as well as mutual funds and oil and gas equities to its clients.

Dividend Discount Model: Manulife declares a dividend of $0.52 per share and its current market price is $13.50. Considering its dividend history, analyst consensus estimates a dividend growth of 2% and a discount rate of 5%. Therefore, the present value of the Manulife stock is calculated as follows:
Present Stock Value = Dividend per share / (R discount - R dividend growth) = $0.52 / (0.05 - 0.02) = $0.52 / 0.03 = $17.33. Since $13.50 < $17.33, the stock is undervalued, representing an opportunity to buy. The same result is derived if we apply the Graham Number, where the stock is discounted by 81.33%

Q3 2015 Financial Results (in USD): Compared to Q3 2014, Manulife’s financial results were as follows:

  • Revenues $7.1 million, down 35.4% YoY from $11 million
  • In Canada, gross flows of wealth and asset management businesses increased 96%
  • Growth 15% growth in retail insurance sales
  • Operating expenses $5.8 million, down 37.4% YoY from $9.3 million
  • Operating income down 24.2% YoY to $1.27 million from $1.68 million
  • Net income down 40.9% YoY to $648 million from $1.1 million

Excluding the impact of continued lower commodity prices on oil and gas that has affected Manulife’s related investments, the company’s YTD investment experience gains would be over $400 million. Therefore, the lower net income is entirely the result of the global volatility in oil and gas commodity prices that does not allow the company to generate the expected level of investment experience gains in core earnings.

Name Price ($) 52 wk low 52 wk high 52 wk low % 52 wk high % Market Cap ($ b) P/E D/E Beta Payout Ratio
Brookfield Asset Management 27.56 26.13 39.00 5.47% -29.33% 27.57 10.96 2.16 1.09 18%
Manulife Financial 12.64 11.74 19.61 7.67% -35.54% 26.61 15.07 0.21 1.38 58%
Sun Life Financial 27.33 25.31 35.13 7.98% -22.20% 17.09 11.38 0.27 1.16 47%

Sun Life Financial (USA) (NYSE: SLF) is a Toronto-based financial services company that engages in the provision of protection and wealth management products and services to retail and corporate clients. Sun Life distributes its products and services through its SLF Canada, SLF U.S., SLF Asia, SLF Asset Management, and Corporate segments, while the company currently operates in Canada, the United States, Australia, Bermuda, China, Hong Kong, India, Indonesia, Ireland, Japan, Malaysia, the Philippines, Singapore, the United Kingdom and Vietnam.

Dividend Discount Model: Sun Life declares a dividend of $1.18 per share and its current market price is $28.25. Considering its dividend history, analysts estimate a dividend growth of 7% and a discount rate of 10%. Therefore, the present value of the Sun Life stock is calculated as follows:
Present Stock Value = Dividend per share / (R discount - R dividend growth) = $1.18 / (0.10 - 0.07) = $1.18/ 0.03 = $39.33. Since $39.33 > $28.25, the stock is undervalued. The same result is derived by applying the Graham formula, where the stock is discounted by 80.33%, representing an opportunity to buy.

Q3 2015 Financial Results (in USD): In spite of the volatility in the global markets, Sun Life has managed to anticipate the challenges and deliver strong results. Revenues reached $4.69 million, down 16.4% YoY from $5.61 million in the same quarter last year. Operating expenses were down 19.4% YoY to $4.0 million from $4.96 million, thereby generating an operating income of $692 million, up 6.0% YoY from $653 million and a net income of $527, up 14.6% YoY from $460 million in Q3 2014. Unfavorable market impacts were primarily due to the decline in equity markets, whereas lower interest rates were offset by gains in credit spreads and swap spreads.


Stock name Dividend Yield
Sun Life Financial 3.42
Manulife Financial 3.01
Brookfield Asset Management 1.42

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